Market Internals


Speaking on business television this morning, Dallas FOMC President Richard Fisher all but assured market participants that the Fed would not stop the central bank's purchases of bonds and mortgage-backed securities cold turkey. This Fed president is known for his initial opposition to quantitative easing, but his topic today was how those purchases could be gradually scaled back to prevent a violent reaction. Market participants made nervous by last week's speculation that easing could end as soon as this summer were reassured. That reassurance was only temporary, however, as another Fed speaker was to tout the strength of the economy.

As all this happened, the RUT had lagged many indices in hitting and exceeding psychologically important round number resistance levels. The siren call of 1000 still beckoned.

By midmorning today, RUT decliners were often ahead of advancers, but volume was soundly in the camp of the advancers. The pattern eventually settled out with advancing issues ahead of decliners, matching the pattern seen on other recent days. The RUT finally rang that 1000 bell, hitting a 1001.50 intraday high.

By the end of the day the RUT and other indices had retreated from their intraday highs, leaving upper candle shadows or wicks on their daily candles. The SPX slipped 0.07 percent; the Dow, 0.12 percent; and the NDX, 0.26 percent. The RUT eased 0.17 percent, and the SOX, 0.32 percent. The important $DJT dropped 0.58 percent. Volatility indices jumped. Financials as represented by the BKX, proved particularly strong this morning and closed 0.49 percent higher, although off the morning high.

Gold and silver futures hit new multi-year lows this morning but soon bounced off those lows. The CMEGroup's settlement figures showed that gold futures for June delivery settled at 1384.10, up 19.40. Silver futures for June delivery settled at 22.343, up 0.338.

Today's low of 20.235 for the June silver (/SI)contract was the lowest seen since September 2010, perhaps driven by selling after a margin call, some pundits speculate. Bloomberg notes that trading in July silver futures was halted several times in overnight trading after prices declined dramatically. Gold reached a low not seen in about four years, at 1336.30 for the June contract. Crude futures gained.

Dollar futures pulled back. The dollar also weakened against both the yen and the euro. Since the EUR/USD was sinking toward a known support level, it's not yet possible to determine whether the bounce was a technical bounce or a move that will endure.

Monday's Developments

Last night, Nikkei 225 futures were at first negative in the pre-market session but trended up as the Nikkei 225 open approached. Sunday afternoon, North Korea had launched another missile, following its launch of three short-range missiles on Saturday. By late afternoon on Monday in Asia, it had fired a fifth and sixth. These apparently were short-range missiles that perhaps could be a threat to Guam. Military experts believe there is not yet any threat to the mainland U.S. or Hawaii.

By their various opens, the Asian bourses frequently mentioned in this Monday report were all positive. All ended in positive territory, too. The Nikkei 225 closed at another new high, at 15,360.81, hitting levels not seen since December 2007. The index has not yet hit its 2007 peak high, however, with that May 2007 high near 17875. Unlike many U.S. bourses, the Nikkei 225 does not even begin to test its long-term high above 38900, hit in 1989.

The Nikkei 225 has most recently shot up on promises that the yen will remain low against other currencies. Last night, Japanese Economics Minister Akira Amari warned that further weakening of the yen could have adverse effects to the population. His statement immediately impacted the yen, halting last night's yen decline. Since the decline of the yen and hopes for further declines have propelled Japanese equities higher, the expected counterpart would be that Nikkei 225 equities would pull back when the yen decline halted. That did not happen. The Nikkei 225 rose 1.47 percent; the Hang Seng, 1.78 percent, and the Straits Times, 0.14 percent. China's Shanghai Composite gained 0.77 percent.

European bourses were mixed. Almost all were trending down toward day's lows, some in negative territory and some approaching the flat-line level, as our markets opened. However, when our markets opened and steadied, throwing off the weakness seen in pre-market futures levels, European bourses bounced off their lows. The FTSE 100 gained 0.95 percent; the DAX, 0.69 percent; and the CAC 40, 0.54 percent. Spain's IBEX 25, however, dropped 0.86 percent, and Italy's FTSE MIB, 0.56 percent.

The Dallas FOMC president was not the only FOMC member speaking today, and the second one did not appear to have the same felicitous effect on the markets. Bullet points for Chicago Federal Reserve Bank President Charles Evans included his notation of "very, very good" consumer spending and an improving labor market. He believes inflation needs to be closer to the two-percent objection, being too weak currently. Talk about beefing up inflation perhaps wasn't cheering to those hoping for more easing. Evans believes that the U.S. would be experiencing growth close to 3.5 percent this year if not for the fiscal drag. He was speaking before the CFA Society.

Evans' glowing talk about the economy was perhaps a bit puzzling, given a report released today by the Chicago Fed. Today's economic releases began with April's Chicago Fed National Activity Index. The Federal Reserve Bank of Chicago reported that this index fell further from March's -23, down to -0.53. The production, consumption and housing components all declined, with production components contributing the most to the headline-number decline. The overall production category contributed -0.34 to the headline number's decline. Industrial production and manufacturing production declined 0.5 and 0.4 percent, respectively. Employment also slipped but only from a +0.1 to zero.

Although the headline number was the lowest since January, the three-month average climbed to -0.04 from the prior -0.05. In addition, 44 of the 85 components improved, with the sales, orders and inventories component numbering among the improving components. That component remained in negative territory, however, climbing to -0.01 from the prior -0.04. In fact, the Chicago Fed's summary noted that out of those 44 improving components, 18 still made negative contributions to the headline number.

The Chicago Fed characterized growth as being "very near its historical trend," with little inflationary pressure expected due to economic activity. The Chicago Fed termed economic activity as "slower."

April's Risk of Recession declined to 22 percent. The prior reading had been 27 percent, but four declines out of the last five months turns April's rise into an outlier month. Moody's pointed to increases in housing permits, rising stock prices and consumer confidence, and declining unemployment insurance benefits as factors in reducing the risk of recession.

Moody's issued another report, a weekly one. The firm concluded that businesses were "not especially enthusiastic" but still upbeat when responding to the weekly Business Confidence Survey. The headline number eased for the second week in a row, dropping to 29.2 from the prior 30.0. Moody's concluded that credit remains "ample," and sales and pricing are "strong" and "sturdy," respectively. However, demand for office space and hiring remain stubbornly soft.

Story stocks today included Yahoo (YHOO, 26.58, up 0.06 or 0.23 percent). Investors learned over the weekend that YHOO's board had approved the acquisition of Tumblr, a social networking and blogging site. The board feels that the acquisition, reportedly for $1.1 billion in cash, will appeal to the younger demographic YHOO wants to court. This will be the biggest deal that Marissa Mayer has undertaken since her tenure as CEO began in July 2012.

Generic drug manufacturer Actavis (ACT, 127.15, up 1.65 or 1.31 percent) will buy specialty drug manufacturer Warner Chilcott (WCRX, 19.60, up 0.39 or 2.03 percent), ACT announced today. ACT will pay $8.5 billion in an all-stock deal. ACT expects $11 billion in annual revenue once the acquisition is complete from the combined companies. Although both stocks jumped this morning, rumors had already circulated more than a week previously that the two were in talks. In after-hours trading, ACT had moved up another $1.56, to $128.71, as this article was edited. Not looking at time and sales, I can't be sure whether this was an errant trade in a small lot that went off after the close or was real buying.

Caterpillar's (CAT, 88.33, up 0.66 or 0.75 percent) monthly dealer statistics, released before the open, revealed that Asia/Pacific retail sales of machines fell 20 percent from the year-ago level. North American sales fell 18 percent, and global sales, 9 percent.

Microsoft (MSFT, 35.08, up 0.21 or 0.60 percent) made the list of story stocks, and it will again tomorrow. MSFT watchers speculate that the company will introduce a new Xbox videogame console tomorrow. Although spending on hardware and software for videogames has fallen this calendar year, some believe that a new Xbox console will find willing buyers. MSFT will likely have competitors, however, as other manufacturers are expected to soon introduce new consoles.

Campbell Soup (CPB, 45.78, down 1.85 or 3.88 percent) reported earnings. Excluding one-time costs, the company reported $0.62/share, beating estimates of $0.56/share. Revenue also beat, breaking a pattern of higher per share earnings but lower than expected revenue often seen this quarter. The company also raised its range for the full year to $2.58-2.62 a share, with the prior consensus view pegged at $2.56 a share. All portions of the soup business performed well, although the company admitted disappointment in its beverage and North American food service businesses. Investors either focused on the concerns or were in a buy-the-rumor, sell-the-fact mood, taking profits. The stock's rise has gone parabolic this spring. The stock sometimes--but not always--sees a strong dip sometime in the May-August period.

After reporting earnings, Urban Outfitters (URBN, 44.49, down 0.05 or 0.11 percent) was off its closing level in after-hours trading, last at 43.34 as this article was prepared. The retailer reported $0.32 per share, well above the expected $0.29 per share. Revenues were light, however, at $648 million versus the expected $656 million.

TiVo (TIVO, 12.66, up 0.08 or 0.64 percent) rose in after-hours trading after reporting earnings. The company reported a net loss that was better than expected while revenues disappointed. The net loss was $0.09/share, better than the expected $0.15 loss. Revenue figures appear to be a bit muddled, with one source reporting revenue of $82.6 million and another, $61.8 million, against expectations of $78 million. The company had not led analysts to expect that $78 million, however. The company's guidelines had been for $60-62 million. Subscribers increased by the largest amount in seven years, the company claimed.

S&P cut Dell's (DELL, 13.41, up 0.01 or 0.07 percent)rating. Carl Icahn was making noise again today, too, about the company's business, although it wasn't clear that Dell wants to reveal any more information to him.

Apple's (AAPL, 442.93, up 9.67 or 2.23 percent) CEO Tim Cook will testify before Congress tomorrow, asking that Congress simplify corporate taxes. He won't be the only one asking for something: the Senate Homeland Security subcommittee on investigations wants to know more about how multinational companies go about moving corporate profits offshore. In testimony published this afternoon, the company denied that Apple Operations International, its Irish subsidiary, is a shell company. AAPL will also likely be questioned about issuing debt to pay for its recent stock buyback rather than repatriating overseas cash. A Senate report claims the company's actions have helped it avoid billions in taxes. Tomorrow's hearing could prove rancorous, watched avidly by other corporations' leaders.

Let's look at daily charts. Last Monday, the chart setups had suggested that it was time for the indices to drop back and retest their 9-ema's by Wednesday or Thursday. Needless to say, that didn't happen. Is it time now?


Those new to my Monday Wraps might find the following two paragraphs useful when interpreting my charts. Those who have read the Wraps can skip straight to the charts. I set up nested Keltner channels on my charts. It's a run-of-the-mill channeling system like the more familiar Bollinger Bands. As with those more familiar BB's, channel boundaries are often targets for upside or downside moves. They also mark levels where prices might find support or resistance on closes. When several channel lines converge, that potential resistance or support might appear stronger, just as it would if 20-, 50- and 100-sma's all converge in one spot.

For the benefit of subscribers, I mark potential upside and downside target/support/resistance levels with ovals, usually green for upside and red for downside. Orange ovals are sometimes used when the darker-colored ones would not allow for a clear examination of the next target. From now on, I will mention the nearest potential support or resistance level in the discussion on the chart, but not the further-out ones. They can be located on the charts if price breaks through the nearest levels on consistent daily closes. If an interpretation such as "support levels appear stronger than resistance, so up looks more likely than down" is possible, I'll tell you. Often we traders must be able to defend our trade against a move in either direction.

As with any type of potential support or resistance, those with profits should be protective of those profits as support or resistance is tested. If prices find support and climb, look to the next higher oval, even one just broken through, as potential resistance. Do the reverse when resistance is breached. Hopefully, this format provides you with the information you need without requiring all night to read as happens when I list each potential support or resistance level individually.

Annotated Daily Chart of the SPX:

If the SPX and other indices had far outrun their red 9-ema's by last Monday, they had certainly outrun it when they hit intraday highs this morning. Even if the rally was particularly healthy, it was time for 3-5 days of sideways-to-sideways-up, small-bodied candles, giving the red 9-ema time to rise up beneath current prices.

However, the SPX had run so far ahead of that moving average that it was possible that the SPX could collapse at any time toward the red 9-ema and the potential support grouped around it. Today's version of the daily candle, leaving behind an upper candle wick or shadow, certainly fit the pattern of a sideways consolidation near the high. The danger to short-term bulls is that this candle could presage a faster dip to 9-ema retest.

If the SPX draws back further, bulls of course want to find daily support holding at the red 9-ema, or at least by the bottom of the potential support zone that extends down to about 1625. Prices that consistently close below that zone target the next support zone from about 1580-1600.

What if the red 9-ema support holds and bounces the SPX or if the SPX yet again does not pull back into a retest before zooming higher again? The SPX has outrun all potential upside targets on the daily chart.

In this case, we can usually look to the weekly chart to determine a next upside target. When the SPX broke through one target-setting Keltner channel on the weekly chart and maintained weekly closes at or above it, it set a new upside target that was then at about 1635. Obviously, the SPX has exceeded that target, pushing the target-setting channel line higher as it did. That channel line is now at about 1680. That's not far ahead, and today's 1672.84 high could be considered a test of the resistance, but that channel line still turns higher. Sustained weekly closes below about 1600 question the viability of that next target. This is a time when short-term bulls should be protective of their gains.

Annotated Daily Chart of the Dow:

A continuation of the Dow's strongest rally pattern would have meant that the Dow was ready for 3-5 days of sideways-to-sideways-up, small-bodied candles and then a dip to the red 9-ema. When the Dow gets this far ahead of this moving average, it sometimes falls abruptly toward it, so that was the potential danger to bulls coming into today's trading.

As if on cue, the Dow produced a candle indicative of indecision, in keeping with a sideways consolidation of recent gains. It's also the type of candle sometimes seen before a decline to test support. We can't be sure that the Dow is going to dip to the red 9-ema before climbing again, but we do know that it will someday retest that moving average. Whenever the red 9-ema is next tested, short-term bulls want to see sustained daily closes at or above that moving average or at least by the bottom of the support zone that extends down toward 15000. Failure to hold support there on daily closes targets the next support zone from about 14700-14890.

What if the Dow bounces after testing the nearest support zone or just zooms higher without even testing that next support? Like the SPX, the Dow has overrun all potential upside targets on the daily chart. It also outran its original next upside target on the weekly chart, nudging that target-setting line higher. That next weekly target is currently at about 15520-15550 but still turning higher. Sustained weekly closes below about 14900 question the viability of that next upside target. It's imperative for short-term traders to keep nudging their profit-protecting stops for Dow-related options trades higher, too.

Annotated Daily Chart of the NDX:

The NDX has treated the rising red 9-ema like a trampoline since April 22, rising ever higher on bounces from the average. That's the longest the NDX has bounced from that average without closing beneath it in more than a year, if my eyeballing of a one-year chart is correct.

As was apparent on the other charts, the NDX has pulled far above that red 9-ema. It's time to retest, although an immediate retest can't be promised. Last week's retreat to retest the average's support never happened, so we can't assured that it will happen this week or the form the retreat will take if it does happen.

Despite last week's no-show of the retest of this average, we still must think about the possibility that the NDX is ready for a retest. Bulls want to see support hold at the red 9-ema or at least by the bottom of a potential support zone that extends down toward 2950. Failure to find support there on sustained daily closes targets the next potential support zone, from about 2850-2890.

The NDX has slightly exceeded its upside Keltner target on the daily chart on Friday but closed at that resistance today. It hasn't truly broken free of that resistance yet on sustained daily closes. Those have been famous last words lately, so let's look at the weekly chart, too, for a just-in-case next upside target. That target is currently at about 3160-3180 but it's still moving higher. Sustained weekly closes below about 2920 and maybe even 2970 would question the viability of that upside target. I personally won't be looking toward an upside weekly potential target until the NDX proves it can sustain breakouts from the being-tested daily one. It's time for short-term bulls to keep moving their stops higher as the NDX moves higher so that they don't give up too many profits if it should suddenly dip into a support retest.

Annotated Daily Chart of the RUT:

Last week, the Monday Wrap questioned whether the siren songs of NDX 3000 and RUT 1000 would prove so compelling that the normal rally patterns would be overcome and prices would melt upwards. That's what happened over the last week until the RUT finally hit 1000 this morning.

Once again this week, this article notes that it's time for the RUT to either drop immediately to retest the 9-ema or trend sideways for a few days while the average climbs beneath it. A warning is also once again warranted. Just because this is the pattern that would normally be seen, we can't count on it happening. Today's candle certainly fit with the idea of a candle consolidating recent gains, but that's all we can say about it at this juncture.

If the RUT retreats to test support, short-term bulls prefer that it find support on daily closes on the sharply rising red 9-ema. If not, they want to see support hold somewhere in that potential support zone that extends down to about 970. Failure to find sustain daily closes somewhere within that support zone and bounce target the next zone, extending from about 945-955.

What if the RUT melts up again tomorrow or one day this week, either after retesting support or even without ever retesting it? Like so many other indices, the RUT has outrun all potential upside targets on the daily chart. We can look to the weekly chart for a next potential upside target. That target is just above 1050. Weekly closes below about 960 would question the viability of that next upside target. Short-term bulls should keep nudging their stops higher to avoid giving up too many profits in case the RUT should suddenly dip to retest support.

Annotated Daily Chart of the Dow Jones Transports:

Today, the transports trended down steadily after its punch to a new high in the first 30 minutes after today's open. Because the transports often move first--and quite fast--we watch it for information about the economy and as a heads-up for how the other indices might behave. If the transports should pull back, bulls in transport stocks and other indices want to see the transports find support on daily closes above 6400. Keep it on your radar screen.

Tomorrow's Economic and Earnings Releases

This week's important economic events are carried forward from Jim Brown's weekend Wrap.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

For more days than this chart shows, pullbacks have found support on 30-minute closes on the peach-colored 45-ema, if not on the other potential support higher within the 1659-1669 potential support zone. The short-term tenor has not changed until prices sustain 30-minute closes beneath about 1659. The next potential short-term downside targets are marked in case that should happen.

If the SPX should climb first thing tomorrow morning, today's high should be watched for potential resistance. In addition, a short-term rising price channel in place for the last few days tops out just above 1680, another area of potential resistance if the SPX should climb tomorrow and get past today's intraday high. Remember that this price channel is rising, and so potential resistance will rise during the day.

Annotated 30-Minute Chart of the Dow:

For more days than this chart shows the Dow pullbacks have found support on 30-minute closes on the peach-colored 45-ema now near 15300. Nothing has changed in the Dow's tenor until it sustains 30-minute closes beneath the bottom of that zone that includes that moving average, down to about 15280. If the Dow should sustain 30-minute closes beneath that zone, the next two lower potential downside targets are marked.

If the Dow should climb tomorrow, today's intraday high should be watched for potential resistance. A short-term rising price channel in place for the last few days extends up toward about 15550 currently, and that should be watched for potential resistance if the Dow should get past today's intraday high. Remember that this price channel is rising, and so potential resistance will rise during the day.

Annotated 30-Minute Chart of the NDX:

For more days than are pictured here, the NDX has found support on pullbacks on the peach-colored 45-ema that is part of the marked current support zone. As long as 30-minute closes are sustained at or above about 3010, nothing at all has changed in the short-term tenor. If the NDX should sustain 30-minute closes below about 3010, the next two potential downside targets are marked.

If the NDX should bounce tomorrow, today's intraday high should be watched for potential resistance. A rising price channel in place today now crosses just above 3040, and that should be watched for potential resistance if the NDX should get past today's intraday high tomorrow. Remember that this price channel is rising, and so potential resistance will rise during the day.

Annotated 30-Minute Chart of the Russell 2000:

For more days than are visible on this chart, the RUT has found support on daily closes at the peach-colored 45-ema. Therefore, until the RUT sustains daily closes below the support zone now extending down toward 990, nothing has changed even in its short-term tenor. Sustained closes beneath that zone target first 985-987 and then 979-984 if support should fail.

If the RUT climbs tomorrow, today's intraday high should be watched for potential resistance. If the RUT should get past that resistance on sustained 30-minute closes, the top of a recent rising price channel currently crosses near 1006-1007. That should be watched for potential resistance, too. Remember that this price channel is rising, and so potential resistance will rise during the day.

As mentioned earlier, last Monday's article questioned whether the siren songs of NDX 300 and RUT 1000 would prove so compelling that the normal rally patterns would be overcome and prices would melt upwards. They certainly were singing compelling siren songs to market participants. Now that those targets have been hit and markets sprang back today from their day's highs, what's next?

We just don't know yet. No matter what our individual feelings might be about whether the rally is overbought or due to add many more points, nothing has yet changed in the overall tenor of the markets. Those 9-ema retests are overdue but are not promised, although I believe it's likely we'll get them this week.

If we should finally get those 9-ema retests on the daily charts, we'll know a little more than we know now by watching how prices behave. Prices that slice through the next support levels without ever pausing will tell us one thing, especially if bounces are tepid and fail to regain those levels. Prices that drop straight to the 9-emas but then bounce hard tell us something different, especially if they achieve new highs. We should watch today's highs for potential resistance, of course, but remain aware that until those marked support zones are violated, nothing has changed. As I have mentioned earlier, I might personally feel that indices are due for a pullback, but that certainly doesn't stop me from adjusting to accommodate the upward movement when such adjustments are necessary.

One further caution: I'm hearing more reports lately of people who let their losses go beyond their planned max loss because they feel that this rally is so overdone. I'm hearing about people in complex options positions who repair those positions by adding more capital to the trade, increasing their risk beyond their initial planned capital in the trade. Don't risk more than you planned to risk, as doing so puts you into a state of mind that makes it difficult to make reasoned judgments. Adhere to your plan.